Mises Wire

The Early History of Regulated Health Care

[Editor's Note: This Q & A with Dr. Michel Accad, M.D. on the economic history of modern medicine covers the "pre-Flexner era" to the Great Depression. Part 2 will feature the period from the the Great Depression to today.]

Q: What is the starting point in the history of the American health care system?

A: The American health care system was born in the 1910s out of the so-called “Flexnerian reform” in medical education and the resulting licensing laws.

Q: Why is that the starting point?

A: Prior to that time, medical care in the United States was essentially unregulated. Anyone could open up a medical practice, and many did so with little training. Patients had complete freedom to obtain medical care from whomever they wished. When such complete freedom exists, one cannot realistically talk about a “system.”

Q: What were the main features of this “pre-historical” period?

A: There were competing forms of medical care. “Regular” medicine continued the tradition emanating from European institutions and medical schools. It was ostensibly represented by the American Medical Association (AMA).

The regular form of medical care tended to be more disposed toward aggressive interventions (blistering, blood-letting, and toxic purgatives), but over time, it also increasingly incorporated scientific knowledge into its mode of practice. Surgery was part of regular medicine, and surgical techniques were improving rapidly in the latter part of the nineteenth century.

Other forms of medical care, such as Eclecticism, herbalism, and homeopathy tended to be less inclined toward aggressive treatments, and each had its own diagnostic and therapeutic philosophy.

There was a multitude of medical schools, and most of them were privately owned. In many cases, the curriculum lasted one or two years after high school. Given this large number of schools, the United States had the highest number of physicians per capita in the world.

Q: It seems like a very chaotic situation. Were patients confused?

A: It is hard to objectively gauge how the population felt about its medical care at the time, but we can document that over the last decades of the nineteenth century, people seemed to favor medical care which embraced scientific discoveries such as the germ theory of disease.

The number of proprietary schools declined, and those that survived did so by improving their standards. Hospitals and institutions which offered more scientific care flourished. An instructive example of how ordinary people were able to distinguish and reward high quality care is that of the early years of the Mayo clinic.

Q: Who was Flexner and what did he accomplish?

A: Abraham Flexner was an important figure in educational activism who was hired by the Carnegie Foundation to study the state of medical education in the United States. He had previously issued a report critical of higher education in colleges and universities.

Flexner and leaders at the Carnegie Foundation were impressed with recent scientific and technological advances and wished to promote a philosophy of "scientific management" of human and social affairs, a philosophy that characterizes the progressive era. At the behest of the AMA's Council on Education, the Carnegie Foundation decided to fund a survey of medical education and hired Flexner for the task.

Flexner spent two years visiting medical schools throughout the continent and published his influential report on Medical Education in the United States and Canadain 1910. After publication of the report, Flexner continued to be actively engaged in promoting the report's recommendations.

Q: What did Flexner find and what did the Flexner report call for?

A: The report is described as "muckraking" by Kenneth Ludmerer, a prominent historian of medical education.¹ Except for a few academic schools which he praised, Flexner condemned the state of medical education in no uncertain terms.

The report called for the closure of all medical schools which did not demonstrate a commitment to scientific standards and did not incorporate a laboratory practice. It also called for licensing laws to require higher educational standards. The report was consonant with the goals of the AMA, established in 1847 ostensibly to strengthen medical education and to reduce the number of physicians. In fact, Flexner collaborated closely with members of the AMA, and the organization provided him with findings of a survey it had previously conducted and on which he relied to write his own, allegedly independent, report.

Q: What effect did the report have?

A: The Flexner report is frequently credited for setting into motion medical education reform, but this is erroneous. Great improvements in education had already occurred in many academic institutions in the previous two decades, and the innovations and higher standards were spreading across the country prior to the report.

The main effect of the report was to change public and political opinion about medical education and to influence the implementation of strict licensing laws. The change in sentiment was facilitated by the political and financial influence of organizations such as the Carnegie Corporation and the Rockefeller Foundation.

In the wake of the report, and under the lobbying efforts of the AMA, states rapidly established medical acts to regulate the issuance of medical licenses. Henceforth, licenses would only be given to graduates of schools that met criteria set forth by the Flexner report. Those medical schools would have to be accredited by the Liaison Committee on Medical Education, a joint venture of the AMA and its close ally, the American Association of Medical Colleges.

Q: What happened next?

A: From an economic standpoint, what happened next was a period of severe medical price inflation which occurred quickly and dramatically. The situation was so serious that in 1925, a national Committee on the Costs of Medical Care (CCMC) was organized to address the question.

The CCMC was also funded by the Carnegie Corporation and by a number of other private foundations, such as the Rockefeller Foundation. The committee received material assistance from the AMA, the American Hospital Association, and other leading professional organizations, as well as from many government agencies, including the National Bureau of Economic Research. Numerous reports were issued over the next few years, and those were compiled in 1932 into a large volume entitled The Costs of Medical Care.

Q: What were the findings of that committee?

A: The CCMC confirmed that the costs of medical care had risen dramatically in the prior years. The committee also found that health care disparities had increased, with access to medical care in rural and poor areas being particularly problematic.

Q: What was the attributed cause?

A: The committee erroneously attributed the cause of medical price inflation to scientific and technological advances, to the increased use of hospital care associated with these advances, and to the associated increases in the costs of medical training and medical supplies.

Q: That sounds reasonable. Why is it erroneous?

A: In general, expensive scientific and technological advances tend to be broadly adopted when they produce commensurate improvements in productivity or well-being. In such cases, the increases in costs are not viewed as causing a crisis, since they are offset by the benefits they provide. The fact that the crisis was blamed on technological advances suggests that other factors were at play.

Q: What were those factors?

A: One factor was the forceful way by which “non-regular” medicine was discredited and Flexnerian medicine promoted. The other factor was the effect of licensing laws on the supply and maldistribution of physicians.

Q:Isn’t it the case that the public realized that a more scientific medicine was better and worth enacting licensing laws for?

A: Whether the public can accurately articulate its desires through the voting booth is difficult to establish.

It is a fact, though, that licensing laws reduce economic choice for patients, including the choice to make personal determinations regarding risks and benefits of care.

When non-accredited care is vigorously denounced as being “non medical” by the academic and political leadership, it is no surprise that the public would come to believe similarly.

Q: Isn’t it a good thing to eliminate substandard care and encourage better medical training?

A: Only if you think that no care at all is better than substandard care.

We should also bear in mind that many expensive medical treatments touted as superior at the time may not have produced better outcomes than less expensive alternative forms of care.

Furthermore, treatments for simple conditions such as minor wounds and fractures might have been reasonably and inexpensively cared for by practitioners with less training than a licensed doctor. The argument is commonly made today that non-physicians such as nurse practitioners and physician assistants can successfully and safely accomplish many tasks so far reserved to licensed physicians. But this idea was completely dismissed by the CCMC, which maintained that:

The physician is the outstanding practitioner of medicine. The need and the value of his service sets him above all others. He alone, of all types of medical practitioners in the United States, is permitted by law to diagnose and treat all diseases and conditions and to use (with certain minor exceptions) any form of diagnostic or therapeutic technique which he considers necessary, desirable, and within his professional skill. (p. 195)

Q: That’s quite an encomium!

A: The concept of medical paternalism comes to mind.

Q: Isn’t there a controversy about the effect of licensing laws on the supply of physicians?

A: Some have argued that the Flexnerian reforms did not have a major impact on the supply of physicians. But while it is true that the supply of physicians was declining before the 1910s, the decline became sharper after licensing laws were enacted. And since the population was growing rapidly, the per capita number of physicians decreased until 1930.2

Furthermore, many of the medical schools which were shuttered were in under-served areas. In particular, out of the seven African-American medical schools existing at the turn of the century, only two survived the Flexner reforms, and all but one of the women's medical colleges were shuttered.

Q: How would you summarize the cause of the increase in medical costs?

A: The cause of the medical cost crisis was primarily the legal measures that reduced the supply of doctors and granted monopoly and a great deal of autonomy to a form of medical care traditionally inclined to favor medical interventions, however beneficial those interventions could be to those able to afford them. Other regulatory interventions in health care also played a role.

We should not say that technological advances per se were the cause of the sustained medical price inflation seen after the Flexner reform.

Q: What was the main recommendation of the committee to address the problem?

A: The main recommendation issued by the committee was to work toward a national health care program. In fact, in a recent review of the report, Dr. Thomas Gore notes that: The most quoted statement from the report indicated the basic problem in medical care was “not the system, but the lack of a system” to organize care.

That point of view remains prevalent to this day.

Q: How did physicians fare during that time?

A: The CCMC report shows that physicians fared well economically and, as a group, belonged to a high income bracket.

Gross physician income constituted about a third of all health care expenditures. The report justified the increased income of physicians on the basis on the increased length of training, the higher costs of doing business, and the amount of charity care provided by physicians, as well as other factors, such as the rise in specialization.

Surgeons did particularly well. Many established and operated hospitals, and in those days, the surgeon’s fee amounted to almost half of the hospital bill. But this did not last long.

Q: What happened next?

A: After the boom of the 1920s, the Great Depression occurred. Patients reduced their medical expenditures dramatically and hospitals found themselves operating at half capacity.

Hospitals and other health care leaders, including members of the American College of Surgeons, began to actively seek models that would provide alternative sources of revenue.

2. Shyrock, who viewed the decline in the supply of physician favorably and claimed it occurred, acknowledged conflicting data on the actual number and proportion of doctors (see note 115). While the total number of physicians and of graduates may have been restored by 1930, compared to 1910, the US population grew markedly during that time and the per capita number of doctors clearly declined. Ludmerer, who quotes Shyrock for the supply data, believes the total number of physicians did not decrease markedly, and he offhandedly dismisses the economic importance of a reduction in the per capita number of physicians.

Michel Accad, MD, practices cardiology and internal medicine in San Francisco, offering individualized care in a free-market setting. His blog about health care and medicine is AlertandOriented.com.